The U.S. Securities and Exchange Commission (SEC) has mandated a cash creation model for the proposed spot Bitcoin ETFs, leading to misunderstandings within the industry. Bloomberg’s Senior ETF Analyst James Seyffart has addressed some misconceptions, clarifying that a spot Bitcoin ETF would indeed hold Bitcoin, contrary to some beliefs that it would not. The public has been confused, thinking that the adoption of this model would mean the fund would not hold actual Bitcoin.
There are also concerns that an approved Bitcoin ETF could function as a fractional reserve product. However, Seyffart has explicitly stated that spot Bitcoin ETFs would hold Bitcoin. In response to his comments, crypto enthusiasts and potential investors have raised questions, including whether ETF issuers would publish onchain addresses to allow verification of the cash creation model’s operation.
The difference between the cash creation model and the in-kind model has been explained through documents presented by BlackRock during meetings with the SEC. The in-kind model involves a five-step process initiated by a market maker (MM) through an Authorized Participant (AP), leading to the purchase of ETF shares via a Quotation Board and the subsequent transfer to an intermediary.
In contrast, the cash model requires the ETF issuer to instruct the withdrawal of cash from cold storage to sell BTC to the MM after the redemption process is initiated. The MM can then initiate a transaction with the ETF issuer to purchase BTC in exchange for USD.
So far, BlackRock and WisdomTree have accepted the cash creation model, with Grayscale also incorporating it into their latest amendment filing. They are now awaiting approval, hoping to meet expectations by accepting cash orders.
The discussions and clarifications around the Bitcoin ETFs are crucial for investors to understand the mechanisms behind these financial products and the implications for the cryptocurrency market. The industry awaits further developments and regulatory decisions that will shape the future of Bitcoin ETFs and their adoption by mainstream investors.